INTRODUCTION
One of the most complex principles of our South African Law is the issue of prescription. Generally speaking, prescription applies when the duty to repay a debt (for example a duty to pay money) lapses after a period of time. It is important to note that once a debt has prescribed, one cannot enforce same thereafter. In our law, and upon the occurrence of certain events, the period of prescription can be interrupted which results in the temporary interruption of prescription.
On the 16th September 2020, and during the hearing of Investec Bank Limited v Erf 436 Elandspoort (Pty) Ltd and Others, the Supreme Court of Appeal analysed the issue of the interruption of prescription in so far as contractual obligations are concerned. The Prescription Act1 provides that contractual and delictual debts extinguish after three years from when the obligation became due. However, and as discussed during the hearing, interruption of prescription can occur when a debtor acknowledges (either expressly or tacitly) liability of a debt to a creditor.
See hereinbelow an explanation of the impact the SCA’s judgment has made in terms of applying Section 14 of the Prescription Act when payments are made towards an existing loan.
BACKGROUND
The crux of the matter that the SCA had to decide on was whether a series of payments, in terms of a secured loan agreement, amounted to an acknowledgement of a monetary debt, which would have interrupted the running of prescription. During February 2000 Investec advanced a loan to Erf 436 (PTY) LTD that was secured by a notarial mortgage bond. The subject of the mortgage bond was a lease which would endure for a period of fifty years in respect of a commercial property. Same loan agreement was in the form of a three-party agreement between Investec (lender), Erf 436 (PTY) LTD (“the Lessee”) and the South African Rail Commuter Corporation (SARCC) (lessor).
1Act No 68 of 1969.
This agreement included an option for the Lessee to be replaced by Investec should the Lessee default in their rental obligations to SARCC. In August 2002, the lease agreement between Erf 436 (PTY) LTD and SARCC was cancelled due to the Lessee’s default in payments. On the 10th of September 2002, Investec demanded that payment be made within seven days by the Lessee. The parties agreed that prescription in respect of the debt began to run on the 17th of September 2002 (the due date of payment).
As a result of the Lessee’s failure to make payment upon demand, Investec exercised its option and concluded a lease agreement with SARCC. During this period the Lessee continued to collect rental from the sub-tenants, same amounts being paid towards the settlement of Investec’s loan.
A second agreement between Investec and Erf 436 was finalized during June 2003, which enabled Investec to take over the function from Erf 436 in managing the property and collecting rental from sub-tenants. The rental income collected by Investec was additionally allocated to the repayment of Erf 436’s loan.
COURT APPLICATION
The above arrangement remained in place from 1 July 2003 until 1 July 2009 when Investec sold its rights as lessee to an entity called Johnny Prop (Pty) Ltd (Johnny Prop). The purchase price received from Johnny Prop was credited by Investec to the Lessee’s loan account. After this amount had been credited, Investec claimed the outstanding amount from the Lessee in a summons served on 21 January 2011. The defence raised by the Lessee was that a period of over 3 years had passed since the loan agreement was concluded between Investec and the Lessee (prescription).
In response to the defence of prescription, Investec argued that the payments made to reduce the Lessee’s loan account, coupled with the various letters made on the Lessee’s behalf, constituted separate acknowledgements of debt. As a result, Investec argued that ‘insofar as prescription may have commenced during September 2002, it was interrupted by express or tacit acknowledgments of liability on the part of [Erf 436] on the dates that each of the payments . . . were effected and on the dates when each of the letters . . . were addressed’.2
2 Para 9 supra.
JUDGMENT
In determining whether the Lessee acknowledged liability of the debt it is necessary to view each act of the Lessee holistically, by evaluating the words used by the Lessee in its correspondence addressed to Investec, together with the allocation of payments. When the Lessee was responsible for the collection of the sub-rental amounts, the payments of those amounts resulted in a series of implied acknowledgments of liabilities, which each payment consequently interrupted the running of prescription.
Investec outlined in detail each payment that was allocated towards settlement of the loan account by the Lessee throughout the period of 2000 – 2008, the last payment being made on the 17th of July 2008. This had the effect of restarting the “stopwatch” on the running of prescription on the liability. The further effect of this payment was that the life of Investec’s claim was extended, and it allowed Invested to serve its summons by 16 July 2011 at the latest.
CONCLUSION
The SCA ordered that each payment made constituted a separate acknowledgement of liability and had kept Investec’s claim alive. It was further ordered that Investec’s summons was served well before the time on stopwatch would have ended. Accordingly, the SCA dismissed the Lessee’s defence of prescription.
This case perfectly explains the interpretation of the Prescription Act in deciding the time periods for when prescription commences, when it is interrupted, and when a claim has prescribed. It also can be viewed as a perfect illustration of how a claim can be a “moving target” so to speak.
The outcome of this SCA judgment displays that numerous factors should be considered when interpreting whether prescription is interrupted. Should you or your business be grappling with collections on book debt, please do not hesitate to contact us for a consultation.
For further information or enquiries, contact us on info@fdclaw.co.za